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Walking The High Wire

May 01, 1994

International Business

WALKING THE HIGH WIRE

On the surface, South Africa's historic transition to majority rule looks as if it could spin out of control. Troops have been dispatched to the rolling hills of Natal province to keep a lid on violence between the followers of disaffected Zulu Chief Mangosuthu Buthelezi and the soon-to-be ruling African National Congress. Housewives in wealthy northern Johannesburg suburbs are stocking up on toilet paper and canned beans. The jittery currency and stock markets sell off at the slightest provocation.

These are the images beamed around the world. But there's another reality. The last-minute agreement on Apr. 19 that brought Buthelezi and his Inkatha Freedom Party into the election showed a remarkable capacity for political dealmaking that could prove crucial in the coming years. And on the 17th floor of Shell House, the ANC's headquarters in downtown Johannesburg, a hot-shot team of young economists, black and white, is putting the last touches on next year's budget. The deputy head, Tito Mboweni, 35, exudes confidence. The living standards of the poor will improve, he affirms, but "we can't just throw money at problems."

Cross town, Rudolf Gouws, chief economist at the Afrikaner Establishment's Rand Merchant Bank and confidant of Finance Minister Derek Keys, takes a call from ANC economic adviser Lieb Loots, a Cape Town academic, and arranges breakfast to discuss government spending. It's the latest in dozens of contacts that have narrowed the gap between largely white-controlled business and the soon-to-be rulers. Recalling that he first met ANC economists in 1989 in Lausanne, when it was still illegal to do so at home, Gouws says: "They've shown a huge change in thinking."

More may ride on this knitting of economic interests than on the Apr. 27 election itself. From that day on, the new Government of National Unity, likely to be dominated by the ANC, will be under constant pressure from its black constituents to spend money to make up for four decades of apartheid. The demands will range from easing 45% unemployment, to overhauling a badly stunted school system, to upgrading entire black townships lacking even indoor plumbing and electricity. But the government will have to tread carefully so as not to frighten off the local businesses and foreign investors that are the best bets to help pay for the job. Managing these conflicting political and economic pressures will require deft work on the part of likely President Nelson Mandela and his key aides.

DEEP-SEATED. The ANC has already produced an economic blueprint with its allies in the Congress of South African Trade Unions. And it has sold the concept, if not all the details, to business. Indeed, the business community and the left-of-center ANC government-in-waiting are surprisingly close on the main points. "There's a deep-seated understanding among ANC economists that the main thing is growth," says Bobby Godsell, a director of Anglo American Corp., the country's largest conglomerate.

A consensus is already emerging among the two groups on the broad outlines of economic policy. These include central bank independence, fiscal discipline, trade liberalization, and the avoidance of tax hikes. That's a long way from the socialist pronouncements delivered by ANC leaders as they returned from exile and walked out of prison in 1990. But with the collapse of communism and the prospect of taking power growing more real, the ANC leaders grew more pragmatic. Talk of nationalization has given way to discussions of easing the mining industry's tax burden if that will lead quickly to more jobs. The ANC "isn't going to nationalize anything," says Gouws. "They might even privatize a thing or two." Some 30% of South Africa's assets are in state hands.

At the same time, business leaders have come to accept that a new government will have to improve the basic living standards of the mostly black poor. Now, the overall strategy looks more like contemporary Mexican-style austerity than a 1960s-style Third World welfare state.

While the ANC has a "New Deal" plan for a massive reconstruction program to build houses, electrify townships, and create jobs, leaders vow they can fund it within snug budgetary guidelines. Although the price tag is put at $11 billion in capital investment alone, planners insist that much of that money can be squeezed from the "post-apartheid dividend" --money redeployed from defense and from duplicative apartheid bureaucracies. But ANC policymakers acknowledge that a lot of luck and even some "voodoo economics" will be needed to meet these targets.

A taste of the new austere tone came in mid-April, when Jay Naidoo, who will head up the reconstruction effort, told a group of educators that last year's budget of $6.5 billion for the country's entire education system was "more than enough money. Now, tell us how you can deliver a better product." As the former top leader of the militant trade union federation, the charismatic Naidoo is one of the new leaders who can credibly make such

demands.

To be sure, the consensus is still fragile. It could be easily shattered by more violence. Continued conflict in Natal could sap precious resources. Says U.S. Ambassador to South Africa Princeton N. Lyman: "I would hate to see the new democracy spend more on security than on development."

PROWLING. Renewed violence would also scare off investors, exacerbating capital flight, estimated at $4.5 billion in 1993, and offsetting a healthy $5.4 billion trade surplus. In March, the decline in gold and foreign exchange reserves continued, as they dropped by more than 10%, to $2.25 billion.

What's more, the ANC is relying heavily on an inflow of funds to finance its ambitious plans to meet blacks' expectations for quick results. If those are not forthcoming, leaders will be pressured to finance their new program, called the Reconstruction & Development Program (RDP) through stiff tax increases or deficit spending, which would in turn further damage investor confidence. Warns Finance Minister Keys: "The RDP has to show it can help a lot of people. But it still must be responsible, otherwise confidence will be lost and there will be no growth."

So far, Americans are reserving judgment about South Africa's transition. Sanctions came off just as U.S. fund managers were prowling for high yields in emerging markets, and the Johannesburg Stock Exchange saw a brief boom last fall. But foreign buyers have become jittery in the tense weeks leading up to the election. And while such U.S. companies as Digital, Reebok, and Motorola have set up sales offices, few manufacturers are sinking capital into new factories. Still, Roger Crawford, president of the American Chamber of Commerce in South Africa and director of a big U.S. health-care company, says companies are starting to visit, "looking beyond the ups and downs."

While making supportive noises, Washington doesn't seem likely to cough up big money for the new South Africa. So far, plans are for $30 million in guaranteed loans for mortgages for low-income housing and the creation of a Southern Africa Enterprise Fund to seed small private ventures.

IN STEP. Fortunately for South Africa's new leaders, they are taking power as the country emerges from a crushing four-year recession. Most macroeconomic fundamentals are perking up. After years of drought, agricultural production is up for the second year, adding a percentage point to the gross domestic product, which is expected to grow by 3.5% this year. And with a world recovery getting under way, South Africa's nongold exports to its major trading partners were up 6% in 1993 over 1992.

As the handover approaches, South Africa has been gradually easing out of 25 decades of isolation and getting in step with the world economy. Recently, it signed onto the General Agreement on Tariffs & Trade, committed itself to the scrutiny of the International Monetary Fund, and applied to the U.S. for favorable trade treatment. A $400 million bond offering in the U.S., Europe, and Japan could be cinched before the end of 1994.

Planners are convinced, though, that an export-promotion strategy is key to growth. To that end, they have delved into studies of key industrial sectors with a view to fashioning a kind of industrial policy. One target for overhaul will be the highly protected auto industry.

As South Africa reopens to the world economy, its relatively high labor costs are likely to come under pressure, creating a serious political issue. The labor movement is a powerful force in South Africa. Years before the ANC was unbanned, the 1.5 million-member Cosatu engaged with business in consensus problem-solving on workplace issues. Although formally allied with the ANC, Cosatu won't want to see its members hurt. The potential for conflict could be eased by the fact that Cosatu and its affiliates will have close links with the new government: More than 20 of their senior officials are ANC election candidates.

Big business, too, is under pressure to adapt for the new era. Last month, Anglo American announced plans to sell off to black business the more than $1 billion in gold and industrial interests of its subsidiary, Johannesburg Consolidated Investments. Other large companies talk enthusiastically of subcontracting to small black businesses. And blacks are being promoted into senior posts. So far, union and ANC leaders aren't insisting on strict affirmative action quotas. But if companies are slow to change voluntarily, quotas could still be imposed.

Still, it will take decades before the economic consequences of apartheid are eliminated. "Our people don't know the difference between cash flow and profit," says an official of the Get Ahead Foundation, which promotes small business development. There is also a vast chasm to be bridged between the new rulers and the public servants of the old regime on whom the new government will still depend. Says ANC economics official Mboweni, who has had dealings with some of the latter: "When we ask them to do something different, they say `Yes'. But they go off and do it the same old way."

For Rebecca Matlakala, a salesperson at Pick 'n' Pay supermarket, the issues are much simpler. She lives in a cramped three-room home with seven other family members in Alexandra, a crowded, crime-ridden black township on the outskirts of Johannesburg. "All I want is a three-bedroom house with indoor plumbing and some privacy," she says. Matlakala and millions of others will only have a shot at seeing such modest dreams fulfilled if the ANC and its partners continue to play their cards with skill and restraint.

POWER BROKERS IN THE NEW REGIME

CYRIL RAMAPHOSA Likely to win the post of Deputy President. Front-runner in the ANC to eventually succeed Nelson Mandela.